Commentary for Tuesday, June 18, 2013 – Gold finished the day down $16.20 at $1366.60 so early morning weakness carried over to the close. The gold bear still rules until traders understand what the Federal Reserve is going to do with its in place monetary easing program.
Actually I think too much is made of changes in this $85 billion a month program because of the money already printed. But the program is virtually all that is now talked about on the trading floor even though Europe remains a mess and the US economic recovery remains sketchy. At any rate slowing in this massive program will mean an eventual rise in interest rates and the possible slowing of an improving but sputtering economy.
These factors could affect gold negatively and so further testing of short term support makes sense. There are two schools of thought: the first is bearish and claims the $1340.00 line in the sand will not hold and gold is further vulnerable through the summer. The second and more plausible given the state of world finance will be a result which produces more of the same range bound trading supported by the physical trade as this recent large sell off continues to settle. We will know more tomorrow as Chairman Bernanke speaks and everyone will be sifting his words carefully looking for clues as to future FOMC plans. One way or the other this tapering of monetary liquidity will be gradual and probably continue into 2014 but keep in mind that the Fed could just as easily change its mind if the US economy drags.
So with all this fanfare of gold oversupply and fund selling you would think the world is floating in gold bullion these days. In fact the latest figure from GFMS (Gold Fields Mineral Services) is 171,300 tons of gold have been mined in human history. But James Turk arithmetic comes up with a figure of slightly more than 150,000 tons. Now figure that a large percentage of that is held by strong Central Banks of the world and will never be sold. Now consider that the Chinese alone have enough cash to purchase all the existing physical gold and it should be easy to see that continuing debasement of paper money must eventually push prices higher. Maybe not tomorrow but the option of less paper money being floated worldwide is not a reality so it’s amazing that the world press is still arguing the price and viability of gold investment.
This is interesting from Sharps Pixley – How China is Coming to Dominate the Gold Market – “THE WORLD’S top gold-producing nation, China, is also quickly gaining on India as the top-consuming country, writes Amine Bouchentouf for Hard Assets Investor. Ever since China entered into its series of five-year economic plans in the late 20th century, it’s not a stretch to argue that its economic rise has been one of the most impressive in human history. Growing at close to double digits per year, China is lifting hundreds of millions of people out of poverty and has embarked on one of the greatest industrialization phases the world has ever known. As I’ve been writing for more than a decade, China may be the most important factor influencing key industrial commodities such as iron ore, copper and coal. China is already the biggest consumer and/or producer of the above-mentioned commodities, and its influence on other natural resources is expanding on a daily basis. In this installment, The Commodity Investor examines the quiet but steady role that China has had in the gold markets in recent years. Many market participants don’t realize it, but China is arguably the most important factor in the gold market today. A lot of casual observers fail to realize that China is now the biggest gold mining and producing country on the planet. For more than 100 years, the country that dominated the gold mining market was South Africa. Blessed with large reserves of ore, an entrepreneurial mining culture and a strategic geographic location, South Africa was for centuries the world’s leader in gold production. That all came to a crashing halt in 2007, when China overtook South Africa as the No. 1 gold producer globally. What’s remarkable is the speed and scale with which China has been able to take the top spot. In 2006, China produced 248 tons versus South Africa’s 272 tons. Now, China produces more than 370 tons per year and may in fact reach 400 tons very shortly. What’s even more impressive is that China has been able to ramp up production while all the other top-producing countries (such as South Africa, Australia and the United States) decreased production. As other countries have scaled back production due to labor, environmental and logistical issues, the Chinese gold industry went into a consolidation phase and now produces more than 60 percent of its gold from only five provinces. China’s state-owned and semi-state-owned gold companies are now some of the biggest in the world. From its position as not only the biggest gold producer, but also the fastest-growing gold producer, China has undeniable influence in setting gold prices globally. In addition to its dominance of the supply side, Chinese demand ranks it as the second-most-important consumer of gold products globally. Along with India, China is part of the two-country block that makes up for the bulk of global demand for physical gold products. While Indiacurrently holds the top spot for gold consumption, China is quickly closing in on its Asian counterpart and may soon overtake it as the biggest gold consumer. Asian countries, led by India and China, have a deep-rooted belief in gold as the ultimate store of value and as a safe-haven asset. When farmers are blessed with a good harvest, the first thing they go out and buy is gold, whether in the form of gold bars or jewelry. Chinese gold consumption is growing at double-digit rates annually, driven in large part by rural consumers, but also by niche urban markets. For example, the number of pawn shops in Chinese cities has exploded, which helped increase demand for gold since consumers can now use their yellow metal as collateral for temporary financial solutions. From its position as one of the biggest consumers of gold, China wields significant influence on setting prices, procurement policies, shipping routes (where to purchase the gold) and other key factors. In addition to its dominance in both the supply side and demand side, China is playing key leadership positions throughout the intricate logistical and financial chain. For example, Chinese mining companies are now some of the most active gold miners in key producing regions such as Africa, Latin America and Southeast Asia. Chinese companies have significant operations in key mining countries such as South Africa, Australia, Ghana, Peru and Brazil. Through these activities, China’s reach into the gold market is global, as it controls significant amounts of the supply chain in key producing regions. This has often come at a cost of constant friction between Chinese mining companies and their host countries. Ghana, for example, has expelled Chinese mining companies and workers who were aggressively exploiting the country’s gold mines without proper licensing and infrastructure. This just goes to show how far China’s influence in the gold markets has gone. Another key market that China may soon come to dominate is the gold ETF market. Over the last decade, the ETF space has been dominated by American firms who have launched and sponsored ETF products to reach a mass investor base. Most of the consumers of gold ETFs have been American and European funds. In a recent move, China has also made its way into the space by launching the first two gold ETFs to be traded on the Shanghai Stock Exchange. There has been a disconnect between the physical markets (dominated by Asian buyers) and the paper markets (dominated by US & EU buyers). With this move, China looks like it may come to dominate this segment of the market as well. Of course, this will not happen overnight, since the ETF market in China is still in its infancy. For investors, it’s critical to keep an eye on what China is doing, since it has such a significant impact on various segments of the gold market.”
Yesterday on CNBC the Chinese Experiment once again was under fire as unsustainable. Too much debt, too much this and too much that but at least a pundit or two brought out the fact that relative to this “too much syndrome” China was in fact still sporting an unparalleled growth rate and sitting on record amounts of US dollars: more than enough cash in to do whatever they wished and certainly enough industrial growth to weather any temporary economic storm.
So my original premise stands that the seeds of dynamic change in the way gold bullion is understood and owned are already planted in this still developing country. These consumer seeds will in time redefine higher prices in gold. And gold bullion will reclaim its rightful place as a financial instrument.
Both walk in and phone trade today was slow probably because everyone will be listening to Bernanke tomorrow looking for clues. Thanks for reading and enjoy your evening. These markets are volatile and involve risk: Please Read Before Investing
Written by California Numismatic Investments (www.golddealer.com).